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The Failing Glitz Of Adjustable Rate Mortgage loans I won't be surprised if this spring's housing market becomes one of the hottest ever. Mortgage loan rates are still very low, making it a good time to buy a home (or refinance an older mortgage loan). Also, many people thinking about buying or refinancing may be spurred to action because they don't want to miss the boat--they know the Federal Reserve is working hard to push rates up, and is sure to succeed sooner or later.
Adjustable-rate mortgage loans, better known as ARMs, allow borrowers to make the cheap mortgage loan magic last a bit longer. Borrowers see 4.2% interest for a one-year term versus 5.6% on a 30-year fixed contract and their choice seems easy. ARMs are expected to grab 40% of the mortgage loan market this year, but that scenario could change abruptly as the Federal Reserve tinkers with short-term interest rates to curb inflation in an expanding economy.
Meanwhile, mortgage loan lenders, faced with plummeting demand for refinancing, are tweaking choices to give homebuyers more ways to keep the monthly payment manageable. Unlike unwavering fixed-rate mortgage loans, when an adjustable-rate mortgage loan's term expires, the interest rate can climb -- sometimes steeply. A growing number of borrowers judge it worth the risk. But no! You're at profit
In today's conditions, which mortgage loan types look good, and which don't?
Clearly, the traditional fixed-rate mortgage loan is king. Rates on 30-year mortgage loans average around 5.7%, or a tad less, depending on which survey you use. By historical standards, that's very low. With a fixed mortgage loan, you know your rate will never go up. This is a great time to lock in a low rate for the long term.
Fixed mortgage loans with 15-year terms now charge about 5.3%. That's a tad cheaper than the 30-year mortgage loan, offering a bit of savings on interest charges. Just remember that your monthly payments on the 15-year mortgage loan would be higher than on a 30-year mortgage loan for the same amount, because you'd pay more principal each month. A 15-year mortgage loan can save you a lot over the long term, because you pay interest for just 15 years instead of 30. But you can enjoy similar savings by getting a 30-year mortgage loan and making extra principal payments when you can.
To weigh these and other options, try calculators offered by the rate-tracking firm HSH Associates, at www.hsh.com. ARMs are not very attractive these days, though lots of people are getting them to qualify for bigger mortgage loans. That's possible because initial rates, and therefore monthly payments, are lower than those on fixed mortgage loans.
Starting, or teaser, rates on ARMs average around 4.3%.
While that's less than the fixed mortgage loan charges, it's typically good for only the first 12 months. Then the rate will adjust once a year based on rates at the time. Most adjustable have rules that allow annual changes of as much as 2 percentage points up or down, and as much as 6 points over the life of the mortgage loan. So an adjustable obtained today could go to 6.3% in 12 months, and 10.3% in future years. You probably wouldn't save enough over the first 12 months to offset the higher payments you might have to make in the future.
Adjustments on these mortgage loans are typically figured by adding 2.75 percentage points to some index, such as the rate on the one-year U.S. Treasury bill. The Fed has a lot of influence over short-term rates like these. So if the Fed raises the funds rate to 3.5% or 4% this year, as many experts expect, the one-year U.S. Treasury bill could go to something like 4% or 4.5%. This should be a wake-up call for anyone who already has an adjustable mortgage loan. If that Treasury bill goes to 4% over the next year, your ARM could go to 6.75%. You could wait to see what happens, then refinance to a fixed-rate mortgage loan. But by then fixed mortgage loans could be charging 7.5% or 8%, and you'd be sorry you missed the 5.7% offered today.
What about hybrid mortgage loans?
These typically offer a fixed rate for an initial period, and then make annual adjustments for the remainder of the term. They're best for people who think they won't need the Mortgage loan for much longer than the initial, fixed-rate term. Today, 3/1 hybrids, with a fixed term for three years followed by annual adjustments, average a starting rate of about 4.8%. The 5/1 is about 5%, the 7/1 is 5.3% and the 10/1 is 5.5%. The 5/1 looks good. The rate offers some significant savings over the first five years. Even if rates jumped afterward, you'd probably still realize savings if you kept the mortgage loan for only six or seven years.
I wouldn't go with a hybrid if I planned to live in a house for 20 or 30 years. But most people don't stay in their homes that long.
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